2 top recession-proof stocks to play it safe

Should prudent investors consider adding these two ‘recession-proof’ stocks to their portfolios now?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

There’s much debate over whether Britain will see a recession at some point due to the result of the Brexit vote, but one thing is certain, there’s a clear consensus that the economy will slow down markedly in the coming months.

With this in mind, now may be the time for prudent investors to start thinking about adding recession-proof stocks to their portfolios.

Reckitt Benckiser

The consumer staples sector is usually a good bet in a recession. Everyday household products, such as soaps and disinfectants, are always in demand, even in recessionary periods. As a result, consumer staple stocks typically have stable revenue growth and predictable cash flows throughout market cycles.

From this sector, Reckitt Benckiser (LSE: RB) clearly stands out from the pack. The company’s 23.7% operating margin contrasts sharply with the industry’s average of around 8%, and demonstrates Reckitt’s wide economic moat and strong brand recognition.

Reckitt recently reported a strong set of results for the first half of 2016, with revenues up 5% from last year to £4,569m, while underlying earnings-per-share rose 16% to 114.7p. Management also reaffirmed its previous full-year guidance for like-for-like revenue growth of between 4% and 5%, and said it expects margin expansion to come ahead of earlier targets.

On 29 July, the company declared an interim dividend of 58.2p per share, which represents an increase of 16% on last year’s 50.3p. City analysts expect Reckitt’s final dividend for this year to grow at a similar rate, with shares currently forecast to trade at a forward yield of 2.1%. That may not seem a lot, but with dividend cover expected to rise to nearly two times this year, I think Reckitt is well positioned for further dividend growth in later years.

On a valuation perspective, Reckitt is somewhat expensive from a historical and relative basis. Shares currently trade at a forward P/E of 25.7, which compares unfavourably to the sector’s average of 20.4 and Reckitt’s own historical average of 18.9. So, although I believe Reckitt would make a great defensive stock pick, I’d hold off buying until the price dips.

B&M European Value Retail

Another sector that would likely benefit from tougher economic times is budget retail. Low-price stores attract more customers seeking value for money during leaner years, as that’s when consumers try harder to cut budgets on everyday spending. That’s what happened in the last recession, and the same would probably happen in the next.

B&M (LSE: BME) first listed on the stock market in June 2014, and investors have so far had a rough ride. Shares in the retailer have recovered from 2015 lows, but the stock continues to trade below its IPO levels.

After an initial bad spell for the company last year, trading is expected to bounce back strongly for B&M over the next few years. Like-for-like sales growth is expected to top 10% this year, with recent new store openings likely to push overall revenues 24% higher for the full year.

City analysts forecast earnings to grow at a 12% average annual pace over the next three years, with the company’s dividend payout ratio expected to rise from 37% now, to 50% by 2019. Currently at 277p a share, B&M trades at 19.5 times forward earnings and pays a 1.8% dividend.

Investment banks are bullish on the stock too. Out of 15 recommendations, 12 are strong buys, two are holds and just one is a strong sell.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How many National Grid shares must I buy for a £100 monthly second income?

I think National Grid could be one of the safest options for investors seeking a dividend income. And today its…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

NIO stock is down 90%. Will it recover?

NIO stock has fallen significantly from its 2021 all-time high. But could now be a chance for this Fool to…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

These 2 UK shares could help me reach £1,000,000 in my Stocks and Shares ISA

A FTSE 100 compounding machine and a FTSE 250 value stock are the UK shares Stephen Wright thinks could help…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

If I’d invested £1,000 in Lloyds shares at the start of the year, here’s what I’d have now

The stock market is unmoved, but Stephen Wright thinks last year’s record profits might give Lloyds shares a long-term boost.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

I’ll snap up shares in this growth stock in March if others don’t get there first

This Fool says shares in this growth stock are stable, full of profit, and might be undervalued. But there are…

Read more »

Rainbow foil balloon of the number two on pink background
Investing Articles

My 2 top energy investment trust picks for a passive income

I'm aiming to buy more of these investment trusts for a passive income and the reasonably stable energy sector returns…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

5.5% dividend yield! Shares like these could be great for my retirement

Oliver Rodzianko thinks this company with a stellar dividend yield could be very useful when looking for income from his…

Read more »

Investing Articles

Should I buy this FTSE 250 stock as it soars back to the FTSE 100?

This FTSE 250 stock has rallied following its pandemic woes. This Fool thinks now could be a good time to…

Read more »